Observations focused on the problems of an underdeveloped country, Venezuela, with some serendipity about the world (orchids, techs, science, investments, politics) at large. A famous Venezuelan, Juan Pablo Perez Alfonzo, referred to oil as the devil's excrement. For countries, easy wealth appears indeed to be the sure path to failure. Venezuela might be a clear example of that.

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The biggest corruption scam in Venezuela’s history continues to thrive under the robolution

February 28, 2008

The Government has once again begun under the new members of the economic Cabinet to sell structured notes into the swap market in order to pressure that exchange rate into going down. So far, in three weeks the Government has sold about US$ 450 million into this market, going back to the non-transparent days of Nelson Merentes.

As I reported then, basically Fonden sells these dollar denominated notes to “friendly” banks at the officials rate of exchange and these financial institutions tun around and sell the notes in the international market at a lower price than they purchased it for, but they are then able to sell the dollars at a much higher rate in the local swap market, using other securities, making a juicy profit.

The effort has been successful, the swap rate has gone down, but once again the issues of transparency, efficiency and corruption are being raised. What is most interesting is that the media is being a little more aggressive this time, questioning more openly the sale of these structured notes to only a selected few who make a lot of money from it.

In the previous batch of sales of these notes, few media outlets questioned them, I can only recall Tal Cual (who called it XXIst Century Robbery) and Ultimas Noticias doing it, but two different newspapers sharply attacked them yesterday.

You see, in the first batch of notes sold in this round, the swap market was at a value in local currency about 25% to 30% higher than the price at which the Government was selling these notes to the friendly financial institutions. Thus, if the Government sold you a certain amount of notes, say US$ 20 million, your profit could be as high as US$ 6 million. Except it isn’t because you only get them because you are willing to pay back some of those same profits to the intermediary that brought you the deal. It is my understanding that the profit is split 40%/60%, with the financial institutions getting the 40% side…

So, you can calculate what profits have been like so far if the Government has sold US$ 450 million in these notes. The notes are not sold at 100%, because the underlying securities make them worth something like 60% on the low end ones. Thus, this says that they have obtained at least US$ 270 million and if profits are 25%, then the juicy deal has given both sides as much as US 67.5 million. Only in the robolution can people make so much money so fast without doing anything.

Two newspapers were sufficiently annoyed this time around to say something yesterday. First, there was Reporte Diario de la Economia which came out with a very aggressive headline “Financial mafia continues to operate structured notes in the country”. This is a translation of part of what they wrote:

“A group of individuals fully identified …has been showing up at local financial institutions and supposedly in the name and representation of high Government representatives, they negotiate a percentage for being assigned structured notes and those not in agreement with the “toll” will not have a right to be assigned any…some bankers used to accept this, but have decided to confront this financial operator with initials M.V…Now they are not only charged 40% , but now they are charged 15% for M.V.“

Separately, Economist Orlando Ochoa in page 6 of the “Strategy” section of El Nacional gives an interview, which was given the headline: “There is corruption in the assigning of structured notes”. I commend Ochoa for his statements and El Nacional for daring to publish it in this rarified atmosphere under Chavez’ Government. Among his charges:

“This means that the resources that y Law have to be used for social development are being destined to foreign exchange gain transactions”

“It is like giving away a margin of 20 to 30% profit to those that receive them, the Minister and the Treasurer decided who gets them”

“One has to ask whether Chavez knows about these operations…”

“The gains are shared between the Government, the bankers and the intermediaries (comissionists). The assigning of structured notes is the biggest corruption case of our history…and this takes place under a Government that calls itself revolutionary and socialist…”

“they are giving a privilege to those that have access to the dollars and they enrich themselves with it”

“Instead of financing equipment for hospitals, build schools, they invest in structured notes”

I understand Ochoa gave names to El Nacional too, but the paper decided not to print them

Some of these things you have read before in this blog (here, here, here), but I can only be happy that more and more people are actually saying it publicly and hope others will join the chorus and stop what is truly the biggest corruption scam in Venezuela’s history by any Government.